Half-year earnings slump expected

Corporate Australia is bracing itself for a seventh consecutive fall in half-year earnings as weak consumer sentiment, the high Australian dollar and deteriorating economic conditions in Europe take their toll.

A flurry of early profit warnings in the new year has priced some of the bad news into share prices but further downgrades are expected.

The last time Australian industrial companies reported half-year earnings growth was in the first half of the 2008 financial year.

“Things will be pretty tough. It reflects the fact that many industrial businesses, from retail to manufacturing and media, are facing both structural and cyclical headwinds,” said Perpetual Investments’ head of equities, Matt Williams.

“On the bright side, balance sheets are in good shape to ride out this period.”

Macquarie Equities is forecasting average earnings per share growth for all listed companies will rise 3.3 per cent for the 2012 fiscal year. However, it warns growth forecasts are strongly skewed to the second half with first-half earnings already tipped to sink 2.9 per cent.

The two-speed local economy will continue to be a theme, although earnings growth for resources companies are expected to ease off record highs. BHP Billiton is this week expected to post first-half underlying earnings of $US10 billion ($9.32 billion), down from last year’s record, while Rio Tinto’s profits are tipped to hit a new high.

The manufacturing, retail and media sectors are expected to be hardest hit as weak consumer sentiment undermines an earnings recovery despite the likelihood of another interest rate cut this week.

While another rate cut could provide a base for a second-half recovery, the big banks are not expected to pass on any cuts in full. Retailers are expected to bear the brunt of weak consumer spending as the fear of job cuts, weak housing prices and global economic woes weigh on sentiment.

The Warehouse Group on Friday became the latest retailer to hose down profit expectations following recent downgrades by surfwear brand Billabong International, JB Hi-Fi and Specialty Fashion Group.

Financial services is seen as another weak spot as the major banks shed jobs and grapple with rising funding costs. Westpac last week announced plans to cut 560 jobs.

Macquarie strategist Tanya Branwhite says she is concerned about a strong uptick in growth expectations by many companies in the second half which could imply further downgrades. “We are entering the seventh half-year [decline] so you get a strong sense about the outlook for our economy,” she says.

UBS analyst Paul Winter expects resources, general industrials and healthcare to be the bright spots.

UBS says there could be potential upside surprises from Primary Health Care, Sonic Healthcare, Flight Centre, Dexus Property Group and AGL Energy. JPMorgan says there is the potential for 27 per cent upside surprises and 38 per cent downside surprises during this report season, which is close to the long-term average.

EPS growth forecasts for listed Australian companies for the 2012 financial year currently average 7 per cent to 8 per cent.

Capital management is expected to be a a major theme, with the possibility of a return to off-market buybacks.